So even though markets are once again heading south at a rate of knots, I’m going to give optimism a try. Chris Dillow has done a rather nice job this week of convincing me that things are not necessarily as ugly as they seem. As he points out on page 16, the wild market swings we are seeing at the moment are not necessarily a sign that the global economy is headed for meltdown, but a reaction to minor reappraisal of the balance of probabilities in which the chance of that meltdown is still slim.
The potential meltdown over which investors are increasingly nervous is, of course, an economic one led by China. But a reassuringly sensible view from fund manager Newton puts this in perspective – “China is slowing down, not melting down”, it says, pointing out that its central bankers have plenty more monetary policy ammunition to cushion the fall from what remains a fairly impressive rate of GDP growth. Indeed, the prospect of possible policy response is still strongly supportive of markets all around the world – although (back to the pessimism, briefly) I do think their credibility with investors is diminishing.
The other big wall of worry being climbed at the moment is the oil price – and surely it is impossible to be at all optimistic on this front, especially after BP’s dreadful results this week? But, putting on my rose tinted spectacles for a minute, and several factors are supportive of a potential oil price recovery. First is that aggregate global demand for hydrocarbons is almost certainly rising, which suggests the global economy is still growing. Secondly, the supply glut we’re experiencing won’t last as irrational production is forced out of the market. And finally, as Chris also reminds us, a falling oil price has historically been a precursor of good markets ahead. Meanwhile there’s plenty of smart money that’s betting on an oil price recovery – we’ve even tipped an oil producer this week (albeit nervously), on the basis that when optimism evaporates it could also be time to go bargain hunting for good companies sold off in the panic – as Simon Thompson also does this week.
So am I a convert to optimism? Not entirely, because fearing the worst can often lead you to ask the questions that help you avoid bad investment decisions – practical cynicism should form part of all investment decision making, a healthy counterpoint to Panglossian optimism and overconfidence.
